Question

Clinton Inc. Company provides two levels of advising services. The costs below are computed at the average monthly volume of 5,000 advising hours for each type of service.

	Basic	Deluxe
Revenues per hour	420	560
Variable cost per hour	120	210
Common fixed costs per hour	42	200

1. What is the contribution margin per hour for the Basic service?

2. What is the contribution margin per hour for the Deluxe service?

3. At this level of activity, what is the net income per hour for the Basic service?

4. At this level of activity, what is the net income per hour for the Deluxe service?

5. Which service should Clinton Inc. try to promote if more opportunity exists in both areas? Type Deluxe or Basic

6. By how much will income change if 200 additional Deluxe advising hours are generated next month?

7. If Basic advising hours double next month, what will be the net income per hour for the Basic service?

Answer 1

Contribution per Hour= Revenue- Variable cost

1. Basic=$420-$120=$300per hour

2. Deluxe=$560-$210=$350 per hour

Net income per hour= contribution per hour- fixed cost per hour

3. Basic=$300-$42=$258 per hour

4. Deluxe=$350-$200=$150 per hour

5. Deluxe

(Because Contribution per hour is more in this case)

6. Present income in case of deluxe= $150*5000 hrs=$750000

Additional=$350*200 hrs=$70000

Total= $820000

Thus income will increase by $70000

7.

	10000 Hours
Revenue	$4200000
Variable exp	$1200000
Contribution	$3000000
Fixed exp (this remains same irrespective of level of activity)	$210000
Net income for 10000 hrs	$2790000
Net income per hr	$279

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